Japan - March 2019S P OT L I G H T
Savills Research

Japan Logistics©ESR LTD

Japan Logistics

Logistics demand stronger than expected
Graph 1: Supply, Take-up And Vacancy In Greater Tokyo, 2010 to 2018

Summary• Despite an inﬂux of supply,
demand was stronger than
expected in Greater Tokyo,
resulting in a vacancy rate of3.3%.
THOUSAND SQ M

• Asking rents have been stable inGreater Tokyo, while rising top
rents are pulling the average up
in Greater Osaka.
• Demand for new facilities frome-commerce and 3PL companies
supports sound pre-leasing
activity.

• Given the sector’s strong
investment demand andmoderate yield spread, cap rates
might have room for furthercompression.

2,000

10.0%

1,500

7.5%

1,0005.0%

500

2.5%

0.0%
2010

2011

2012

2013

2014

2015

2016

2017

2018

Note: Annual periods from February to January.
Source Ichigo Real Estate Service, Savills Research and Consultancy

Graph 2: Greater Tokyo Rent Vs Vacancy, Q1/2016 to Q4/2018

Average Rent (LHS)

Average Vacancy (RHS)

4,500

6%

4,250

5%

4,000

4%

3,750

3%

3,500

VACANCY RATE

• Major logistics companies have
improved ﬁnancial performance,
which appears to have resulted
in strong demand for logistics
facilities.

12.5%0JPY / TSUBO / MONTH• Investor interest in this sector
remains strong, highlighted by
the recent announcements ofnew funds targeting logistics
facilities.

Net Absorption
Vacancy Rate (RHS)

VACANCY RATE• Greater Osaka vacancy fell to
7.1% as the market continues todigest supply added in 2017.

Completions
5Y Avg Completions (2014-2018)
2,500

2%
Q1

Q2

Q3

2016

Q4

Q1

Q2

Q3

2017

Q4

Q1

Q2

Q3

Q4

2018

Note: Annual periods from February to January.
Source Ichigo Real Estate Service, Savills Research and Consultancy

Introduction
Prompted by demand from e-commerce andthird-party logistics (3PL) companies, thelogistics market continues to witness a wave ofsupply that will extend through 2019. Despite
surging supply in Greater Tokyo in 2018,
demand growth was stronger than expected
early in the year and resulted in tighter vacancy
in 2H/2018. In particular, properties thatare advantageously located close to demand
centres are experiencing strong leasing
activity. In Greater Osaka, existing vacant
space has been gradually let up, resulting in asubstantial tightening in vacancy. Althoughsome properties in the bay area might requiresavills.co.jp/research

2more time to ﬁll up space, overall market
conditions are likely to tighten further.
Market Trends
In Greater Tokyo, vacancy declined by 0.9
percentage points (ppts) year-on-year (YoY)
to 3.3% as a result of improving demand. Many
new facilities saw sound pre-leasing before
starting operation, while existing properties
also let up vacant space. Although asking
rents in this market posted a slight decline
in 2H/2018, they are generally stable around
4,200 yen per tsubo. The peripheral area
also appears to have held up rental levels,
despite concerns over supply along the Ken-OJapan Logistics

Expressway. While large properties require
more time to lease, new locations proximate
to demand centres with good access to major
thoroughfares appear to be seeing sounddemand.
Large projects in 2H/2018 included
facilities such as ESR Kuki Distribution
Centre, MFLP Prologis Park Kawagoe,
and GLP Goka. These facilities reportedly
had some vacancy upon completion,
though demand from e-commerce and3PL companies steadily ﬁlled the newspace. Additionally, LaSalle Investment
Management’s Kanto Transport Sayama
Logistics Centre came online as the largest
logistics centre of Kanto Transport, withadvanced features allowing for the storage ofNotwithstanding a wave of new
supply, the logistics market has seen
stronger-than-expected demandin 2018 marked by sound leasing
activity. Supported by positive
prospects, interest in this sector
remains strong among investors.

Graph 3: Supply, Take-up And Vacancy In Greater Osaka, 2010 to 2018

Net Absorption
Vacancy Rate (RHS)

2,000

16%

1,500

12%

1,0008%5004%

VACANCY RATE

THOUSAND SQ M

Completions
5Y Avg Completions (2014-2018)

0%02010

2011

2012

2013

2014

2015

2016

2017

2018

Note: Annual periods from February to January.
Source Ichigo Real Estate Service, Savills Research and Consultancy

Graph 4: Greater Osaka Rent Vs Vacancy, Q1/2016 to Q4/2018

Average Rent (LHS)

Average Vacancy (RHS)
15.0%

3,500

12.5%

10.0%
3,300
7.5%
3,200
5.0%
3,100

VACANCY RATE

JPY / TSUBO / MONTH

3,400

2.5%

3,000

0.0%
Q1

Q2

Q3

2016

Q4

Q1

Q2

Q3

2017

Q4

Q1

Q2

Q3

Q4

2018Note: Annual periods from February to January.
Source Ichigo Real Estate Service, Savills Research and Consultancy

3wholesale foods at ﬁve diﬀerent temperatures.
Demand for advanced cold and chilled storage
features should continue to grow as volumes ofpharmaceutical goods, as well as frozen foods,
are expected to increase. The completion of
the phase-out of hydrochloroﬂuorocarbon(HCFC) refrigerants - commonly used in older
facilities - in 2020 is expected to create some
supply shortage as well.
In Greater Osaka, vacancy tightened 5.7ppts
YoY to land at 7.1%, a signiﬁcant decline fromthe recent peak of 13% in Q3/2017. Although
the bay area was showing signs of struggle asa result of abrupt supply increases, vacancy
in this area appears to be tightening as well.
For instance, Logiport Amagasaki gradually
let up remaining vacant space and reportedly
exceeded 50% occupancy after a little overa year from its completion. Asking rents
continued to show improvement across themarket, with top rents gradually increasing
through 2018 and recently exceeding 6,000
yen per tsubo. New high-speciﬁcation facilitiesshould continue to pull up average market
rents. As the industry has been adopting modal
shifts from trucks, logistics locations with
ﬂexible transportation routes may also enjoy
sound demand over a longer term1.
Incoming Supply
Greater Tokyo continues to experience a
glut of supply as about 2.8 million sq m of
new space is expected to enter the market in
2019. Chiba Prefecture is expected to accountfor almost a half of total supply with a highconcentration in the bay area, including
Ichikawa, Narashino, and Funabashi, while
inland locations such as Nagareyama andInzai continue to increase total space as large,multi-phase projects add new buildings.
In Kanagawa, the enormous Logiport
Kawasaki Bay oﬀering 300,000 sq m isslated for completion in May 2019. Although
its location in Higashi Ogijima, a logistics
hub, is advantageous, according to LaSalle
1For instance, in 2018, four major beverage companies
announced their collaboration plan to utilise railways forweekly product deliveries between Kansai and Kyushu, atransport capacity equivalent to 2,400 trucks. Sagawa
Express also signiﬁcantly reduced drivers’ working hours byincluding marine transport in its delivery route between
Tokyo and Fukuoka. However, the partial shutdown of theSanyo Line after torrential rain in West Japan caused atemporary surge in demand for truck deliveries and remindedindustry players of the importance of business continuity
planning.

Japan Logistics

Graph 5: Six-month-ahead Expectation For Rent And Capital Appreciation,2008 to 1H/2019
Rents

Capital Values

100
80.9

78.0
69.2

80

74.3 75.0
66.8
53.3
53.3

66.3

DIFFUSION INDEX

60
40208.4

0 13.0
-20.5

-20

-42.0

48.8

28.7 23.121.025.3
27.3
25.9
22.6
19.2
18.7

34.8
25.6 28.6

7.7

14.1
6.9

-14.8

-37.7
-40

50.5

38.9

29.9

29.7
13.8

-15.9 -3.7

-6.3

-4.8

5.0

-13.1

-25.9

-63.9 -40.3

-60
-80
-86.2
-100
1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H
2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

19

Source Ichigo Real Estate Service, Savills Research and Consultancy

Graph 6: Comparison Of Tokyo Grade A Office And Logistics Expected Cap Rates,April 2009 to October 2018
Grade A Office (Marunouchi/Otemachi)

Multi-tenant Logistics (Bay area)

7%

6%
1.5%

5%

1.0%

4%

3%

Source JREI, Savills Research and Consultancy

Graph 7: Share Of Investment Volumes By Asset Class, 2007 to 2018
Logistics

OfficeResidential

Retail2011

2013

Hospitality

Other

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%0%
2007

2008 2009

2010

2012

2014

2015

2016

2017

2018

Source RCA, Savills Research and Consultancy

savills.co.jp/research

4

Investment Management, over 250,000 sq
m of Logiport Higashi Ogijima A, B, and C
will see the lease terms of multiple tenants
come to an end in 2019 and 2020. Consideringthat ESR is also building three large facilities
totalling about 680,000 sq m between 2020
and 2025 on the artiﬁcial island, the area mightexperience some loosening in vacancy in themedium term.
In Greater Osaka, around 350,000 sq m isestimated to enter the market in 2019. This is arelatively moderate amount compared to 2017
when large properties were rapidly completed
over a short period of time. Each new property
in Osaka Prefecture is expected to be lessthan 40,000 sq m and will be located inland,
which should avoid aggravating vacancy in thebay area. In Hyogo, large projects such as theMapletree Kobe Logistics Centre are set toenter the market. Although the total amountof new space is not very substantial, theimpact might be felt temporarily as the sizeof the Kobe inland market is relatively small
compared to the expected supply.
Investment Trends
According to Ichigo Real Estate Service’s
investor survey, fewer market participants
hold pessimistic views on current market
conditions and more see room for rental
growth compared to previous periods.
The improvement is rooted in strong
demand trends exhibited both in Greater
Tokyo and Greater Osaka. While many
investors sense that the Japanese logistics
market is approaching its peak, improving
performance metrics indicate that the late
upward cycle may continue longer thanpreviously expected, albeit at a slower pace.
Indeed, recent announcements of new funds
targeting this sector illustrate sound investor
interest.
The Canada Pension Plan Investment
Board (CPPIB) has committed US$700
million to GLP Japan Development Partners
III. The new fund will be used to ﬁnance
GLP Sagamihara. In January, it also became
public that ESR, AXA Investment Managers,
and an undisclosed sovereign wealth fundformed a joint venture and acquired six
properties from ESR’s portfolio for about
US$1 billion. Additionally, LaSalle Investment
Management plans to launch a new fund,Japan Core Fund, including Logiport Sakai
in Osaka as one of the fund’s seed assets.
The ﬁrm aims to expand its AUM to JPY300
billion after ﬁve years from the launch ofthe fund and about 25%, or JPY75 billion,
is expected to be allocated to the logistics
sector.
According to the Japan Real Estate
Institute’s (JREI) semi-annual investor
survey in October 2018, expected cap rates
for multi-tenant logistics facilities remained
unchanged from the previous period for theﬁrst time since April 2013. However, logistics
properties still maintain a yield gap of 1.0%

Japan Logistics

over Grade A oﬃces. In countries such as
the U.S. and the U.K. where e-commerce hastaken a stronger hold, yield gaps between
Grade A oﬃces and logistics properties arealmost non-existent. This could indicate thatfurther compression may be feasible in thelogistics sector in Japan as well, particularly if
more capital ﬂows to logistics assets, thereby
supporting the maturation of the market.
Improving Operator Performance
As we reported in the April 2018 Japan
logistics spotlight, Yamato Transport
undertook drastic measures to improve its
working environment by increasing wages
and converting temporary truck drivers into
permanent staﬀ. The change was probably
necessary as, unlike in other industries, thephysically demanding nature of delivery work
appears to be making it diﬃcult for female
and elderly workers to ﬁll the labour gap inthe logistics industry. Despite subsequent
increases in labour costs, operating proﬁts
of its home delivery business increased toJPY1 trillion, up by 9.2% YoY as of Q3/FY2019.
This is largely due to the company’s eﬀorts
to transfer additional costs to its clients:
revenue per package for large corporate clients
increased over 16% YoY for the same period.
The wide publicity of the logistics industry’s
labour shortage might have eased theimplementation of price increases, as clientsare well aware of the industry’s cost burden.
This might eventually lead to much-awaitedwage growth across the logistics sector andother labour-strapped industries. Over thelong term, technological advancements shouldalso help alleviate labour constraints as thegovernment is preparing infrastructural andlegal frameworks for the implementation of
new technologies across the country2.
2 In December 2018, the world’s ﬁrst platooning experimentwith a lane keeping assist (LKA) system was carried out. The
government is aiming to establish the vehicle platooning
technology with auto-driving trucks by 2020 andcommercialise it sometime between 2021 and 2023.
Additionally, autonomous vehicles are being tested for last
mile deliveries. Companies such as Yamato Transport andJapan Post Services are experimenting with the technology
to achieve faster deliveries without labour constraints.

Table 1: Selected Investments, Announced October 2018 to February 2019

PROPERTY NAME

TRANSACTION APPRAISAL DIRECTVALUE (JPY MIL)CAP RATE

BUYER

SELLERMFLP Inazawa

16,2004.60%

MFLP REIT

Mitsui Fudosan

MFLP Atsugi II

13,1004.30%

MFLP REIT

Mitsui Fudosan

MFIP Inzai (80%)

10,0404.70%

MFLP REIT

Inzai SPCMFLP Fukuoka I

5,263

4.90%

MFLP REIT

Mitsui Fudosan

Fujisawa Logistics
Center4,305

4.30%

Japan Logistics
Fund

Mitsui & Co. Real
EstateSource Company Disclosures, Savills Research and Consultancy

Outlook
Supported by stronger-than-expecteddemand in 2018, the logistics sector issignalling further growth. Demand forlocations near consumption centres is
especially strong and vacancy rates remaintight. Furthermore, average rents remain
stable in Greater Tokyo and continue torise in Greater Osaka, improving investors’
prospects for future rental growth. Despite
increasing labour costs, logistics companies
such as Yamato Transport and Sagawa Express
recorded sound ﬁnancial performance,
subsequently contributing to strong leasing
demand for logistics facilities. These
companies appear to be successfully oﬀsetting
the impact of wage growth through service
price increases.
Although Greater Tokyo will continue to see
an inﬂux of supply in 2019, strong underlying
demand is likely to absorb new space withoutcausing an abrupt increase in vacancy. Leasing
activity should proceed smoothly, particularly
for convenient locations. Greater Osaka isalso seeing sound demand across the market,
though the bay area may require more time
to absorb the large volume of supply. Keeping
the current pace, existing vacancy is likely to

be digested over the next few years. Marketparticipants are becoming more optimistic
about rental growth. Small logistics facilities
are expected to perform especially well as theyrequire fewer workers to operate. Amenities
such as nursery rooms and cafeterias are
becoming more common in new facilities toattract workers.
Furthermore, as illustrated by the recent
announcements of new funds targeting this
sector, investment interest in the Japaneselogistics market remains strong. Cap rates forlogistics properties might compress slightly,
considering additional increases in capital andthe relatively attractive yield spread compared
to prime oﬃce buildings.
That said, supply concentrations in certain
areas remain concerning. Large facilities
distant from major thoroughfares andresidential areas may continue to struggle aspotential tenants are worried that they may
not be able to retain suﬃcient workforce. A
shortage of truck drivers is another concern
in the logistics industry. With labour costsconstantly increasing, expectations forworkforce automation as a long-term solution
are higher than ever.

For more information about this report, please contact usSavills JapanSavills Research

Christian Mancini
CEO, Asia Paciﬁc(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Director, Head of Research& Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Senior Director
Asia Paciﬁc+852 2842 4573
ssmith@savills.com.hk

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